The Design of a Carbon Tax

We consider the design of a tax on greenhouse gas emissions for a developed country such as the United States. We consider three sets of issues: the optimal tax base, issues relating to the rate (including the use of the revenues and rate changes over time) and trade. We show that a well-designed carbon tax can capture about 80% of U.S. emissions by taxing fewer than 3,000 taxpayers and up to almost 90% with a modest additional cost. We recommend full or partial delegation of rate setting authority to an agency to ensure that rates reflect new information about the costs of carbon emissions and of abatement. Adjustments should be made to the income tax to ensure that a carbon tax is revenue neutral and distributionally neutral. Finally, we propose an origin-based system for trade with countries that have an adequate carbon tax and a system of border taxes for imports from countries without a carbon tax. We suggest a system that imposes presumptive border tax adjustments with the ability of an individual firm to prove that a different rate should apply. The presumptive tax could be based either on average emissions for production of the item by the exporting country or by the importing country.

Optimizing Urban Distribution Routes for Perishable Foods Considering Carbon Emission Reduction

The increasing demand for urban distribution increases the number of transportation vehicles which intensifies the congestion of urban traffic and leads to a lot of carbon emissions. This paper focuses on carbon emission reduction in urban distribution, taking perishable foods as the object. It carries out optimization analysis of urban distribution routes to explore the impact of low carbon policy on urban distribution routes planning. On the base of analysis of the cost components and corresponding constraints of urban distribution, two optimization models of urban distribution route with and without carbon emissions cost are constructed, and fuel quantity related to cost and carbon emissions in the model is calculated based on traffic speed, vehicle fuel quantity and passable time period of distribution. Then an improved algorithm which combines genetic algorithm and tabu search algorithm is designed to solve models. Moreover, an analysis of the influence of carbon tax price is also carried out. It is concluded that in the process of urban distribution based on the actual network information, the path optimization considering the low carbon factor can effectively reduce the distribution process of CO2, and reduce the total cost of the enterprise and society, thus achieving greater social benefits at a lower cost. In addition, the government can encourage low-carbon distribution by rationally adjusting the price of carbon tax to achieve a higher social benefit

Will Border Carbon Adjustments Work?

Abstract and PDF report are also available on the MIT Joint Program on the Science and Policy of Global Change website (http://globalchange.mit.edu/).The potential for greenhouse gas (GHG) restrictions in some nations to drive emission increases in other nations, or leakage, is a contentious issue in climate change negotiations. We evaluate the potential for border carbon adjustments (BCAs) to address leakage concerns using an economy-wide model. For 2025, we find that BCAs reduce leakage by up to two-thirds, but result in only modest reductions in global emissions and significantly reduce welfare. In contrast, BCA-equivalent leakage reductions can be achieved by very small emission charges or efficiency improvements in nations targeted by BCAs, which have negligible welfare effects. We conclude that BCAs are a costly method to reduce leakage but such policies may be effective coercion strategies. We also investigate the impact of BCAs on sectoral output and evaluate the leakage contributions of trade and changes in the price of crude oil.This study received support from the MIT Joint Program on the Science and Policy of Global Change, which is funded by a consortium of government, industry and foundation sponsors

Sharing the Burden of GHG Reductions

Abstract and PDF report are also available on the MIT Joint Program on the Science and Policy of Global Change website (http://globalchange.mit.edu/).The G8 countries propose a goal of a 50% reduction in global emissions by 2050, in an effort that needs to take account of other agreements specifying that developing countries are to be provided with incentives to action and protected from the impact of measures taken by others. To help inform international negotiations of measures to achieve these goals we develop a technique for endogenously estimating the allowance allocations and associated financial transfers necessary to achieve predetermined distributional outcomes and apply it in the MIT Emissions Prediction and Policy Analysis (EPPA) model. Possible burden sharing agreements are represented by different allowance allocations (and resulting financial flows) in a global cap-and-trade system. Cases studied include agreements that allocate the burden based on simple allocation rules found in current national proposals and alternatives that specify national equity goals for both developing and developed countries. The analysis shows the ambitious nature of this reduction goal: universal participation will be necessary and the welfare costs can be both substantial and wildly different across regions depending on the allocation method chosen. The choice of allocation rule is shown to affect the magnitude of the task and required emissions price because of income effects. If developing countries are fully compensated for the costs of mitigation then the welfare costs to developed countries, if shared equally, are around 2% in 2020, rising to some 10% in 2050, and the implied financial transfers are large—over $400 billion per year in 2020 and rising to around$3 trillion in 2050. For success in dealing with the climate threat any negotiation of long-term goals and paths to achievement need to be grounded in a full understanding of the substantial amounts at stake.Development of the EPPA model used has been supported by the U.S. Department of Energy, U.S. Environmental Protection Agency and U.S. National Science Foundation, and by a consortium of industry and foundation sponsors of the MIT Joint Program on the Science and Policy of Global Change

Overcoming barriers to the implementation of alternative fuels for road transport in Europe.

The success of implementing alternative fuels for road transport depends on their cost, performance and reliability. This paper focuses on the use of natural gas and LPG, hydrogen and biofuels in Europe. A brief presentation is given of their technical development status, their market potential, and barriers to their implementation in various market segments. Some market barriers are common to many new technologies, and can be overcome through adequate policy measures at European level. Generally, a combination of policies is required, and a number of supporting measures increase their effectiveness. The following policies affecting energy use in transport are discussed: market incentives, policies targeting technology and vehicle efficiency, and overall system improvement

Investing in the Clean Trillion: Closing the Clean Energy Investment Gap

In 2010 world governments agreed to limit the increase in global temperature to two degrees Celsius (2 °C) above pre-industrial levels to avoid the worst impacts of climate change. To have an 80 percent chance of maintaining this 2 °C limit, the IEA estimates an additional $36 trillion in clean energy investment is needed through 2050 -- or an average of$1 trillion more per year compared to a "business as usual" scenario over the next 36 years.This report provides 10 recommendations for investors, companies and policymakers to increase annual global investment in clean energy to at least $1 trillion by 2030 -- roughly a four-fold jump from current investment levels

Climate Risk and the Fossil Fuel Industry: Two Feet High and Rising

As climate change effects grow more pronounced, there can be little doubt that an industry that produces 68 percent of human greenhouse gas emissions will find itself under increasing pressure. The risks to the industry correlate with progress on climate goals. Unless a technological breakthrough can restrict carbon releases, the fortunes of the fossil fuel industry and the stability of Earth's climate will be locked in a zero-sum game. Climate's gain is the industry's loss and vice versa. For coal, the threats posed by climate action are already being felt. Coal's fortunes now rest with developing countries, where decisions to seek China-style, coal-led development will increasingly be met by international pressure to choose an alternate path

Reform of the Fiscal and Subsidy Regime for the Petroleum Sector (Based on a Report Commissioned by the Petroleum Federation of India)

Reform of the oil sector is long overdue. The problems in the sector emanate from the structure of central taxes and the system of subsidisation through prices. Solutions to the problems necessarily have to address both tax and subsidy simultaneously. The social losses include, misuse / wasteful use of scarce petroleum resources, diversion, adulteration, other avoidable negative externalities, improper substitution between products, tax arbitrage, distortion of consumer preferences and input choices of industries, and international cross hauling of petroleum. Nearly all these costs, and problems arise not because of subsidisation per se but due to the use of varying retail prices that are used to subsidise. Prices for the same product vary for different consumers besides. They also vary across products. These tax /subsidy variations are the root cause of nearly all problems in the sector. Autonomous price variations (i.e. those resulting from the actions of firms (under a regime of non-distortionary subsidies) would be small and not subject to ‘arbitrage’ i.e. to the realisation of rents through diversion and adulteration. Tax reform – viz casting all taxes in the form of value added taxes has not taken place in the sector despite the passage of nearly 15 years since such reform was put in place in nearly all other sectors of manufacturing. Complete deregulation of the sector allowing oil producers, oil refiners, marketing companies, and integrated operators to price their products as they deem fit. Recast central indirect taxes (excise whether specific or ad valorem) into a value added tax, as for any other product., i.e., allowing input credit for all registered intermediate users of petroleum products is overdue. Central government revenues can be protected by working out a revenue neutral value added tax rate. This we have estimated approximately to be 110-120% of value added uniformly to all segments in the industry. Such a tax regime would also be neutral to the degree of vertical integration and remove the biases in the use of products. The Public Distribution System (PDS) is not necessary and ought to be dismantled. Kerosene would then be sold in the open market for all consumers. Kerosene could also be sold by retail outlets, kirana shops, other retail outlets, and by current PDS retailers on par with kirana shops/ ROs. Ditto for LPG. Subsidies are administered through endowments defined upfront, which allows the subsidised consumer to access his/her endowments, trade the same, convert the same into cash all without the causing any distortion. Only pipelines are subject to regulation by the Petroleum and Natural Gas Regulator. The second best proposals involve the changes/recommendations as before but additionally creates a “Crude Price Stabilisation Fund” (CSF) that allows crude prices (both sharp rises and sudden falls) to be moderated, so that pass thru is influenced by the managers of the CSF. It is important that the CSF is set up as in independent body and insulated from the government and is governed by strict and automatic rules that make rapid price adjustment (to the market prices) necessary when the fund position is low, so that the probability of the fund going bankrupt is kept at nearly zero. A fund between $25 to 40 billion is envisaged. A fund of$40 billion (Rs. 200,000 crore) envisaged as a credit line would work in most situations. The fund would operate with strict limits on the quantum of the credit line used to pay out stabilization subsidies during the boom phase of the price cycle as also on the accumulated reserves built up from stabilization taxes during the bust phase of the price cycle. To ensure that such crude stabilisation measures do not affect the competitiveness of the industry exports of product (and crude) are taxed when crude is subsidised, and subsidised when crude is taxed. Appropriate conversion factors would apply. The conversion factor should be based on a refinery loss of between 10 and 7% say 8.5%.

Economic Analysis of Feed-in Tariffs for Generating Electricity from Renewable Energy Sources

Feed-in tariffs, renewable energy

Climate policies for road transport revisited (II): Closing the policy gap with cap-and-trade

Current policies in the road transport sector fail to deliver consistent and efficient incentives for greenhouse gas abatement (see companion article by Creutzig et al., 2010a). Market-based instruments such as cap-and-trade systems close this policy gap and are complementary to traditional policies which are required where specific market failures arise. Even in presence of strong existing non-market policies, cap-and-trade delivers additional abatement and efficiency by incentivizing demand side abatement options. This paper analyzes generic design options and economic impacts of including the European road transport sector to the EU ETS. The point of regulation in a road transport cap-and-trade system should be upstream in the fuel chain to ensure effectiveness (cover all life-cycle emissions and avoid double-counting), efficiency (incentivize all abatement options) and low transaction costs. Based on year 2020 marginal abatement cost curves from different models and current EU climate policy objectives we show that in contrast to conventional wisdom road transport inclusion would not change the EU ETS allowance price. This puts concerns over industrial carbon leakage as a consequence of adding road transport to the EU ETS into perspective.Climate Policy, Road Transport, Cap-and-trade